Investing in India: A Complete Beginner Guide for NRIs
I said once-in-a-lifetime opportunity, and I wasn't joking. According to a paper published by Morgan Stanley, India is on track to become the world's third-largest economy by 2027, overtaking both Japan and Germany. There are many factors that are currently in India's favor, such as the highest population of young working people, strong domestic demand, and a strengthening financial sector. There has never been a better time to invest in India.
But then, it's not as straightforward for an NRI as compared to an Indian citizen living in India.
Who Is An NRI
NRI or Non-Resident Indian, in simple terms, is an Indian citizen or a person of Indian origin who has spent more than 183 days abroad during the last financial year. And before an NRI can invest in India, one crucial step must be completed.
Bank Accounts
Set Up a Bank Account. There are mainly two types of bank accounts an NRI can open in India. NRE account and a NRO account. And the main factor that decides which one to open is repatriation. And repatriation is, in simple words, the ability to send money back to the country where it came from. Money in a Non-Resident External or NRE account is totally repatriable. But then you can only deposit money from abroad, and it gets converted and credited in Indian Rupees.
Later you can freely convert them back to foreign currency and transfer funds back to your country of residence anytime. And since you have already paid income tax to the foreign government for the money you transfer to an NRE account, these funds and their interest are completely tax-free.
On the other hand, an NRO, or a Non-Resident Ordinary account, works on a non-repatriation basis. The funds here cannot be transferred back to the NRI's country of residence or converted to foreign currency. Technically, it's possible, but the process is more complicated and has limits. This is best suited for those having sources of income in India, such as rental property, pension, dividends, etc.
Also, if you want to open a joint account with someone living in India, like your parent, you can do that only with an NRO account. However, the funds here and the interest you acquire are taxed according to the normal income tax rates. But then a crucial prerequisite to open a bank account, is to do the KYC.
Know Your Customer
This is a way for the banks to ensure their clients are who they claim to be. To complete KYC and open an account, you must fill out an application form and submit copies of your PAN card, passport, foreign and Indian address proof, and passport-size photos.
All documents must be self-attested and also attested by a recognized authority. Once we submit the form along with all the necessary documents and open an account, we can start investing. But then, where should we invest?
Fixed Deposit
This is one of the safest investment options out there. You put a fixed amount of money in an account for a fixed duration and earn interest for the deposit. The normal interest rates for fixed deposits in India are around 5%. But then those who want more return with low risk can consider investing in bonds.
Bonds
Bonds are considered a more secure investment option, where companies or a state borrow money from you. Ideally, you act as a bank and provide a loan to the state or company, receiving interest in return. So, they are also called debts. The risk is that the state or companies could go bankrupt. Since it is highly unlikely that the Indian Government will go bankrupt anytime soon, government bonds are one of the safest investment options for risk-averse investors. And the returns are not that bad.
For example, the GOI savings bonds have a 7.75% return.
You can buy government bonds through banks, dealers, or directly from the Reserve Bank website.
Besides a bank account, you will also need a DEMAT account to buy or sell bonds, which I will come to shortly. Keep in mind that when you buy bonds from the state or companies, always check for the credit rating. The higher the rating, the safer the investment. But what you are after is maximum returns for your investment, then nothing can beat what I am going to tell you next.
Stocks
Stocks are stakes in a company, and by owning a company's stock, you technically own a piece of the company. And as the company grows, so does the value of your stock.
You make profits when you sell them at a higher price than you bought. And the places where they are sold and bought are the stock exchanges. India's main stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Companies list their stocks on the exchanges and are classified based on their market capitalization or simply the company's worth.
Large-cap stocks are stocks of the top 100 companies, mid-cap between 101-250, and from 251 onwards, all are small-cap stocks. For Large-cap stocks, you can get an average return of 10-12%, Mid-cap: 14-16%, Small-cap: 16-20%. Small Cap Stocks grow the fastest because these are small companies with the highest growth potential. But there is also the risk that the company may not exist after a few years. The larger the company, the more stable it is, but lesser growth.
When we talk about stock markets, we also have to discuss Market Indexes. An index represents a collection of stocks that can be grouped together based on size or industry. The most common indices in India are the NIFTY and SENSEX. NIFTY is a basket of the top 50 companies listed on the NSE. The SENSEX is a similar index of 30 companies listed on the BSE. The index goes up when prices of stock of major companies on the exchange goes up and vice versa. So it gives you an overall indication of the market performance.
But then, we cannot directly walk into the NSE or the BSE to buy or sell shares. And for that there are investment brokers. And the major ones in India are Zerodha Groww, ICICI Direct, etc. Once we register with a broker, the next thing we need is a trading account to purchase and sell shares. And the shares bought are stored in electronic format in a digital locker called the Demat account linked to your NRE or NRO bank account.
If it seems complicated don’t worry, once you register with a broker, they will provide these accounts for you. Trading account is the one through which we must place a buy or sell order, and this request is then forwarded to the stock exchanges. And once the trade is completed, the securities are deposited in the Demat account, and the required amount is deducted from the linked bank account.
This procedure is the same for NRIs and Indian citizens living in India. But then NRIs need an additional step called the Portfolio Investment Scheme to buy and sell shares. But before we check what a PIS scheme is, we need to understand what is a primary and secondary market.
The primary market is where new shares and bonds are offered to the public for the first time. If a company wants to enter the stock market, they do it through an initial public offering (IPO) in the primary market. Later, when buying or selling a share, we are not buying from the company directly. We are buying it from others who are willing to sell their shares in the secondary market, also known commonly as stock exchanges.
If NRIs want to buy or sell shares in the secondary market, they need a PIS account linked to the trading and demat account. The main purpose of this account is to bring transparency to the Reserve Bank of India about the origin of these funds.
Once we fill and submit a PIS form with the bank where we opened our NRE/NRO account, the bank will forward this to RBI, and later, we will receive a PIS permission letter and can start trading. Banks have to regularly inform RBI about the transactions we make with our PIS account. And they charge a fee for this. But then we don't need a PIS if we buy from the primary market or only invest in mutual funds.
Mutual Funds
A fund is a collective investment where money is pooled from many people and then invested together in the stock market. You can think of it as a company that collects all the investors' money and buys shares with it. This is a great option for diversifying your investments into different sectors and reducing the risk associated with individual ones. These funds are managed by fund managers who assess the various investment options and decide where to invest.
This means less work for you and more work for the fund manager. However, nothing in life comes for free, and we pay the price for the effort the fund manager puts into managing our investment. This is called the expense ratio of a fund, which is typically around 0.5% to 1%. The best way to invest in mutual funds in India is through the Systematic Investment Plan or SIP. Here, we invest a fixed amount of money regularly in a mutual fund scheme.
For example, I currently invest with a SIP in a Multi-Cap fund from Canara Robeco. Money is divided and invested between small-cap, medium-cap, and large-cap companies. But, since most of the investment goes into medium and small-cap companies, these are very high-risk investments.
But I am in a stage of life where I can take a bit more risk for higher returns. But the investment that made me very high returns in the last 5 years was a ULIP.
Insurance Plans
Unit Linked Insurance Plans, or ULIPs, are one of the ideal options for investors who want to invest for the long term and also want a backup. They're a hybrid product that combines the advantages of investing and life insurance into a single package. Here, we pay a premium for a fixed number of years and then get the money along with all the profits after the maturity period. Part of the premiums goes toward insurance coverage, and the remaining is used to invest in financial instruments such as mutual funds of our choice. I invested in a Platinum Plus Plan from Canara HDFC five years ago, with a 20 Lakh insurance policy and the money nearly doubled.
So although there are enough opportunities for an NRI to invest in India, there are also some restrictions.
Restrictions
As an NRI, your total investment in a company cannot exceed 10 percent of the company's total capital. I think this won’t be the case with most of us. Also, NRIs are not allowed to do intraday trading, also known as day trading. This is when you buy a stock for a lower price in the morning and sell it for a higher price in the evening. I am not into trading and always look for the long-term when it comes to my investments. So, for me, this doesn't make any difference. But something that can make a difference is taxes.
Tax Implications
NRIs are supposed to pay capital gains tax, similar to resident investors. This is the tax we must pay for the profits or gains we make from selling our investment. If we sell our investments within a year, we have to pay a Short Term Capital Gains (STCG) of 15%, and for investments held for more than 1 year, a Long Term Capital Gains Tax of 10%. However, long-term capital gains from equity investments up to Rs. 1 lakh are exempted from tax.
I hope this blog gave you a good start point to begin your investment journey in the Indian stock market. Keep in mind that every investment involves risk, so do your research and choose wisely before investing your hard-earned money. Also, If you want to support me, please go through my other blogs also. Thanks.
Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. It is important to do your own analysis before making any investment.
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